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Journal Of Investment Management, Vol. 15, No. 4, (2017), pp. 69–91

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C A S E S T U D Y

“Case Studies” presents a case pertinent to contemporary issues and events in investment man-agement. Insightful and provocative questions are posed at the end of each case to challenge thereader. Each case is an invitation to the critical thinking and pragmatic problem solving that are sofundamental to the practice of investment management.

PRICING FOR SURVIVAL IN THE BIOPHARMA INDUSTRY:A CASE STUDY OF ACTHAR GEL AND QUESTCOR

PHARMACEUTICALSTerence C. Burnhama, Samuel Huangb,c and Andrew W. Loc,d,e,f ,∗

Recent cases of aggressive pricing behavior in the biopharmaceutical industry have raisedserious concerns among payers and policymakers about industry ethics. However, thesecases should not be confused with price increases motivated by challenging businessconditions that ultimately lead to greater investment in R&D and improved patient accessto therapeutics. We study the example of Questcor Pharmaceuticals, which was forced tochoose between increasing the price of an effective drug in 2007 and ceasing productionand shutting down. We consider Questcor’s journey from inception to its acquisition in2014, analyze the factors leading up to the price hike of its main revenue generator, ActharGel, and discuss its resulting impact on patients after 2007. A counterfactual financialsimulation of the company’s prospects in the case where prices were not increased showsthat Questcor would have become insolvent between 2008 and 2010.

aChapman University George L. Argyros School of Busi-ness and Economics, Chapman University, Orange, CA.bMIT Department of Chemical Engineering, Cambridge,MA.cMIT Laboratory for Financial Engineering, Sloan Schoolof Management, Cambridge, MA.dMIT Computer Science and Artificial Intelligence Labo-ratory, Cambridge, MA.eMIT Department of Electrical Engineering and ComputerScience, Cambridge, MA.fAlphaSimplex Group LLC, Cambridge, MA.∗Corresponding author. E-mail: [email protected]

1 Introduction

The overall cost of drug development has morethan tripled in the last 15 years due to growingR&D costs and rising failure rates. Since 1950,the number of approvals for new medicines per$1 billion of R&D investment has roughly halvedevery nine years (Scannell et al., 2012). In 2003,developing one new drug required about $800million, including opportunity costs and failures(DiMasi, Hansen & Grabowski, 2003); it now

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70 Terence C. Burnham et al.

typically takes more than 10 years and $2.6 bil-lion for a drug to reach the market (DiMasi,Grabowski & Hansen, 2016; Mullard, 2014). Dueto these high costs, drug prices are commensu-rately high to meet the required rate of returnfor shareholders. The two most expensive drugsin the world—Soliris and Spinraza—both break-through therapies for rare diseases, each costover $600,000 per patient per year (Palmer, 2015;Weintraub, 2017). Though financial rewards arenecessary to create incentives for innovation andrisk-taking behavior in any industry, rising U.S.healthcare costs have drawn intense scrutiny tothe pharmaceutical industry’s business modelsand practices (Gillespie, 2016).

In particular, Big Pharma has been heavily crit-icized for its reliance on large annual priceincreases to drive revenue growth (Crow, 2016).An analysis by Credit Suisse of 20 leading globalpharmaceutical companies concluded that 80%of 2014 profit growth in the United States wasdriven by increases in price rather than sales vol-ume (de Felice, 2017). This pervasive price-basedbusiness model has spread as R&D efficiency hasplummeted, and as the frequency of new productlaunches has declined (Deloitte, 2016). Critics ofthis practice have pressured the biopharma indus-try to rein in prices. In response, pharmaceuticalcompanies such as Allergan (Saunders, 2016),Novo Nordisk (Roland, 2016), and Abbvie (Sta-ton, 2017) have taken the lead in self-regulation,promising voluntary annual price-increase limits(Beasley, 2017).

Given that companies actively engaged in dis-covering new therapies face such pressure whenpricing drugs, it is not surprising that even greatercontroversy surrounds companies and CEOs thatsignificantly increase the prices of products theydid not develop themselves. Two infamous casesof such practices, Turing Pharmaceuticals andValeant Pharmaceuticals, have recently added to

the political and public outrage on pricing. MartinShkreli, the CEO of Turing, acquired the 60-year-old antiparasitic drug, Daraprim, increasingthe price over 5,000% from $13.50 to $750 perpill, while Valeant’s business model seemed tobe centered on routinely increasing the prices ofacquired drugs (Pollack, 2015; David, 2016).

Such extreme price hikes drew considerableattention from politicians, as presidential can-didates Hillary Clinton (Egan, 2016a; Kaplan,2016) and Donald Trump (Egan, 2016b) con-demned price-gouging behavior and pledged pric-ing reform, sending biopharma indices tumblingseveral times in 2016. An August 2016 Galluppoll of U.S. citizens found that pharma had theworst reputation among the 24 industries listed,its lowest standing in 16 years (Saad, 2016).

In light of these events, it is especially importantto distinguish between price-gouging behavior—which is unacceptable in any industry—andbusiness decisions that impact the wellbeing ofpatients. Because businesses are ultimately profit-seeking entities, the contrast may be a fine line.We hope to sharpen this line by describing the caseof Questcor Pharmaceuticals, which was forcedto choose between increasing the price of a life-saving drug to stay in business, or stopping itsmanufacture and going out of business.

Questcor Pharmaceuticals faced criticism forincreasing the price of its primary drug, Acthar,over 45,000% from 2001 to 2007, and particu-larly in August 2007, when the price increasedfrom $1,650 to $23,269 per vial (Pollack, 2012;Smith, 2016; Tirrell, 2015; Plieth, 2012; Mitchell,2008). While this increase may have generatedcontroversy, we argue that the basis for this deci-sion was distinct from the price-gouging behaviorthat seems to have characterized other pharma-ceutical products. We relate Questcor’s journeyfrom inception to its acquisition in 2014, analyz-ing the factors leading up to the price hike and its

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Pricing for Survival in the Biopharma Industry 71

resulting impact on patients after 2007. Finally,we conduct a counterfactual financial simulationof the company’s prospects if prices had remainedthe same in 2007.

Apart from providing earlier historical informa-tion for context, we shall confine our attention inthis case study to the period from 2007—whenQuestcor installed new leadership and changedits corporate strategy, including (but not limitedto) its pricing of Acthar—to 2014 when it wasacquired by the specialty pharmaceutical com-pany Mallinckrodt and control changed hands.

2 Acthar background

Acthar Gel was developed over 60 years ago bya subsidiary of the meatpacking giant Armour& Company, and approved by the FDA in 1952for about 50 inflammatory diseases prior to theKefauver Harris Amendment of 1962, whichrequired drug manufacturers to provide proof ofefficacy as well as safety (Pollack, 2012; Mech-catie, 2010a; Silverman, 2014; Krantz, 1978). Itwas subsequently FDA-approved for acute exac-erbations of multiple sclerosis (MS) in 1978 basedon efficacy and safety data, though it still was notsubjected to the robust efficacy standards of today(ThinkEquity Partners LLC, 2006). The Frenchchemical and pharmaceutical company Rhone-Poulenc Rorer acquired the rights to Acthar fromArmour, merged with HoechstAG to formAventisin 1999, and then sold Acthar to Questcor in 2001(Pollack, 2012). In 2014, the global specialtypharmaceutical company Mallinckrodt acquiredQuestcor to obtain the drug, and currently manu-factures it (Pollack and Bray, 2014). To this day,Acthar’s production process, which consists ofpurifying pituitary glands from pigs, remains atrade secret rather than a patent-protected process.

Acthar is a complex formulation containing nat-urally occurring adrenocorticotropic hormone(ACTH), a peptide that binds to melanocortin

receptors throughout the body (Mechcatie,2010a). The drug provides an extended releaseafter intramuscular or subcutaneous injection, andinduces the adrenal gland to produce endogenouscorticosteroids. However, evidence shows thatstimulation of melanocortin receptors elsewheremay also be clinically meaningful, suggestingthat Acthar’s overall mechanism is more com-plex than a synthetic steroid such as prednisone(Seeking Alpha, 2011). Because steroids wereoften a good substitute for Acthar, however, thedrug largely fell out of use in the 1980s whensteroids became cheap to manufacture. Prior tothat, Acthar was commonly used in patients witharthritis, lupus, ulcerative colitis, and a variety ofother inflammatory diseases (Pollack, 2012).

Replaced by prednisone for many diseases,Acthar was then primarily used to treat acuteexacerbations in MS and an off-label condition(not FDA-approved for treating the condition),infantile spasms (IS), a severe form of epilepsythat affects roughly 2,300 infants per year. Ifleft untreated, the disease causes mental retarda-tion and physical impairment (Mechcatie, 2010a;Oppenheimer Equity Research, 2008). An aver-age Acthar treatment course for IS is about sixweeks, requires four to five vials, and featuresbeneficial responses in around 80% of IS cases(Stanford Group Company, 2008). Rapid therapycan achieve complete resolution of IS in 50% ofpatients by two years of age and in 72–99% ofpatients by five years (ThinkEquity Partners LLC,2006). For example, a 1983 study published inNeurology, the official journal of the AmericanAcademy of Neurology, reported the followingresults (Snead III, Benton & Myers, 1983):

We treated 116 children with ACTH or prednisone. Fifty-two had infantile spasms with hypsarhythmia, and 64had other types of intractable seizures. ACTH completelycontrolled seizures in all patients with infantile spasmsand hypsarhythmia and 74% of those with other types

Fourth Quarter 2017 Journal Of Investment Management



of seizures. Prednisone controlled 51% of patients withinfantile spasms and none with other seizures.

For decades, Acthar was an important first-linetherapy for IS, and was recommended as themost effective treatment for the disease by theAmerican Academy of Neurology (Kossoff et al.,2009).

Consequently, in 1995 when physicians experi-enced a severe Acthar supply shortage due to itsdifficult manufacturing process, a public healthcrisis ensued. Although its manufacturer at thetime, Rhone-Poulenc Rorer, initially chose to dis-continue the product, protests by patient groupsand physicians demanded that the firm continueto make a limited supply (Leary, 1996). From1997 to 2001, Acthar was rationed to 1,600patients per year, compared to a demand estimatedat 6,500 patients per year (ThinkEquity Part-ners LLC, 2006). Rhone-Poulenc Rorer, whichbecame Aventis in 1999, suffered annual losses inthe millions on the drug (Pollack, 2012). Acthar’scomplex, expensive manufacturing process wasunsustainable at the price of $50 per vial in alow-volume market. By 2001, its production wasin the process of being discontinued; afterwards,its availability to patients would have been lost(Pollack, 2012).

3 Questcor background

Questcor Pharmaceuticals, formerly namedCypros Pharmaceutical Corporation, was head-quartered in Anaheim, California, and foundedin 1990. Cypros merged with RiboGene in 1999,and named the fully integrated company QuestcorPharmaceuticals (Pharmaceutical Online, 1999).The new firm sold three products with numerousclinical-stage development programs focusing onacute- and critical-care specialty hospital pharma-ceutical products. Questcor’s initial strategy wasto build strong hospital-focused sales, market-ing, and distribution capabilities, and to acquire

and develop synergistic late-stage drug candi-dates (Questcor Pharmaceuticals, 2001). In 2001,the company bought the struggling Acthar assetfrom Aventis for $100,000 and a 1% royalty onannual sales greater than $10 million (Pollack,2012; Questcor Pharmaceuticals, 2001).

Acthar’s previous 50-year existence had two mainimplications for Questcor. First, although Actharwas not patent-protected, Questcor could relyon its secret, complex manufacturing process asa key barrier to entry for competition from ageneric version of Acthar (Questcor Pharmaceu-ticals, 2006). Second, due to different standardsof approval in the 1950s, Acthar had on-labelindications that were not subjected to the levelof evidence demanded by more recent FDA stan-dards (Silverman, 2014). As a result, Questcormaintained full-pricing power as the sole man-ufacturer of Acthar, with the option to marketthe drug for a variety of indications without run-ning extensive clinical trials. After acquiring thedrug, Questcor increased the price from $50 to$700 per vial in an attempt to make it financiallyviable (Pollack, 2012). However, the companycontinued to struggle, in part due to an expensivemanufacturing transfer process and a variety ofoperational challenges.

4 Questcor’s challenges, 2001–2007

4.1 Manufacturing

Acthar’s production process consists of threemain parts: extraction of the active pharma-ceutical ingredient (API), production of fin-ished Acthar vials, and quality control usingthree assays. Unlike a purely synthetic product,Acthar’s API is a complex biologic prepara-tion, extracted from the pituitary glands of pigs,and this preparation potentially includes as yetuncharacterized active components in its formu-lation. In 2003, Questcor successfully startedoperations at the contract manufacturer (CMO)




Chesapeake Biological Laboratories to producevials from the API still provided by Aventis(Questcor Pharmaceuticals, 2003). A year later,Questcor enlisted CMO BioVectra to perform theAPI extraction. In 2005, the firm gained FDAapproval for two quality control bioassays trans-ferred from Aventis to a contract laboratory. Dueto cost and time difficulties in transferring thethird assay for potency, Aventis continued to per-form it for Questcor (Questcor Pharmaceuticals,2005). Because producing Acthar was compli-cated, transfer of the know-how incurred costsof over $1.2 million from 2003 to 2004. Thetransfer of manufacturing from Aventis to newCMOs also resulted in higher unit costs and lowergross margins of 78% (Questcor Pharmaceuticals,2004). However, manufacturing, while impor-tant, was a relatively small part of Questcor’sfinancial struggles.

4.2 Operational challenges

Questcor’s operations were consistently under-performing because its products—which spannedneurology, nephrology, and gastroenterology—did not generate adequate revenues. Until 2007,selling, general, and administrative (SG&A)expenses were consistently greater than 60% ofrevenues (Figure 1). In comparison to a median

34% SG&A/Revenue ratio for small- and mid-capdrug companies in the NASDAQ Biotechnologyindex (David, Robey & Matthews, 2017), Quest-cor’s operating losses from inception in 1999 until2007 were not surprising.

Acthar had such a small patient population that thesales volume was too low to be profitable, evenat the 2006 price of $1,650 per vial. Moreover,Questcor’s sales representatives were prohibitedby U.S. law from marketing the drug to neurol-ogists for the treatment of IS, despite its statusas standard of care in the United States, becausethe use of Acthar for IS was off-label. If a physi-cian did happen to initiate a discussion, the salesrepresentative had to refer the doctor to Quest-cor’s medical science liaisons (MSLs), who werepart of the firm’s R&D group. By law, MSLs areonly permitted to respond to inquiries and provideunannotated, published scientific literature. Thiswas particularly problematic because physiciansare often unaware of the standard-of-care treat-ment options for rare diseases (Shire, 2013). Itis estimated that Acthar’s penetration into the ISmarket was, at best, 50% in 2006 (ThinkEquityPartners LLC, 2006).

Questcor faced an ethical dilemma: despiteActhar’s status as standard of care, the firm

27%

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2 0 1 32 0 1 22 0 1 12 0 1 02 0 0 92 0 0 82 0 0 72 0 0 62 0 0 52 0 0 42 0 0 32 0 0 22 0 0 1

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EVEN

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Figure 1 Questcor SG&A expenses as a percentage of revenue, 2001–2013.




Table 1 History of Acthar pricing, 2000–2012.

Acthar price over time

Price Acthar priceYear increase ($USD) Source

2000 N/A 50 Pollack (2012)2001 1,300% 700 Pollack (2012)2002 26% 879 Approximated2003 26% 1,104 Approximated2004 17% 1,292 (10-K 2004)2005 14% 1,473 (10-K 2005)2006 12% 1,650 (10-K 2006)2007 1,310% 23,269 (10-K 2007)2008 4% 24,153 Approximated2009 4% 25,071 Approximated2010 4% 26,024 Approximated2011 4% 27,013 Approximated2012 4% 28,000 Pollack (2012)

could not proactively educate neurologists on thedrug’s ability to treat IS. Consequently, Questcorinvested in R&D to prepare a supplemental newdrug application (sNDA) to include IS onActhar’slabel (Marrone, Bass & Klinger, 2007; Stafford,2008). Although Questcor raisedActhar’s price tofund its unique situation (Table 1), the firm stillendured annual net income losses between 2001and 2006 (Figure 2), excluding 2005, when CEOJames L. Fares was hired. Under his leadership,Questcor divested its non-neurology drugs for

$22.5 million to stay in business, paid down$6.2 million in debt, and adopted a new businessstrategy (Questcor Pharmaceuticals, 2005).

The firm shifted its focus to central nervous sys-tem (CNS) diseases to streamline its marketingefforts towards neurologists. In 2006, in additionto acquiring and marketing Doral, a neurologydrug for insomnia, Questcor ramped up market-ing efforts for Acthar in MS to build a sustainablebusiness and fundActhar’s sNDAfor IS. Questcorinvested about $7 million to expand its sales divi-sion from 15 sales representatives and managersto 40 (Questcor Pharmaceuticals, 2006). How-ever, the larger sales team did not generate enoughdemand for Doral and Acthar to compensate forthe company’s increased SG&A expenses and therevenue lost from its 2005 divestiture. That year,revenue decrease by about $1.4 million and theFDA rejected Questcor’s sNDA for IS (QuestcorPharmaceuticals, 2006).

The expensive sales team had a significant nega-tive impact on Questcor’s bottom line, as SG&Aexceeded revenue by 35% (Figure 1), leadingto operating losses of $10 million (QuestcorPharmaceuticals, 2007). This highlighted keybarriers for a successful Acthar-based businessmodel not present in previous decades when thedrug was profitable at a lower price. AlthoughActhar was originally a first-line drug used for

Figure 2 Questcor’s net income leading up to 2007 when the price of Acthar was increased.




numerous diseases, just as the steroids thatreplaced it are today, its situation in the early 21stcentury was unusual. Though it was an approvedtherapy for acute exacerbations of MS since 1978,rationing of the drug due to the 1997–2001 man-ufacturing issues reserved the drug for patientswith IS, causing it to largely fall out of use inthe MS indication (ThinkEquity Partners LLC,2006). Significant sales efforts over time wereneeded to drive adoption of the drug for this indi-cation again. In IS, the drug could not be marketedto doctors under any circumstance as it had neverbeen formally approved for this indication.

Questcor’s strategic gamble had failed.

5 Questcor’s performance, 2007–2014

Heading towards bankruptcy, Questcor replacedJames L. Fares with Don M. Bailey—an engineerwith little prior biopharma experience who wasthe former chairman and CEO of Comarco, asuccessful wireless technology company—andimplemented a new strategy for Acthar (Quest-cor Pharmaceuticals, 2007). Questcor raised theprice of Acthar from $1,650 to $23,269 pervial (Table 1) while simultaneously expanding

its sponsorship and co-pay assistance pro-grams to facilitate access for uninsured andunderinsured patients (Questcor Pharmaceuticals,2007). Questcor was finally profitable in 2007,generating pre-tax income of about $23 million(Figure 2).

With a financially viable drug, Questcor now hadresources that allowed it to grow its sales andmarketing capabilities, as well as to conduct newclinical trials to expand Acthar’s labeled set ofindications. In addition to improving adoption inMS, the company successfully marketed the drugfor nephrotic syndrome (NS) and many rheumaticdiseases. And in 2010, the FDA’s approval ofActhar as a monotherapy for treating IS finallyallowed Questcor’s sales force to market the drugfor the indication to which Acthar was the defacto standard of care (see Section 6.2 below fora discussion of Acthar’s efficacy).

As a result of this expanded label and a con-currently growing patient population, Questcorexperienced massive growth over the next sevenyears. The share price increased more than200-fold, from less than 50 cents on August7, 2007, when the new pricing level was

Figure 3 Questcor’s historical stock returns in comparison to the NYSE MKT Composite Index and theNASDAQ Pharmaceuticals Index, 2009–2013.




implemented, to $93.60 on August 14, 2014,when the firm completed its sale to Mallinckrodtfor $5.6 billion (Figure 3).

Throughout Questcor’s rapid growth, the com-pany consistently beat earnings forecasts whileenduring significant volatility. Shares were up13% after its Q3 2011 earnings were announced,as revenue beat analysts’ expectations by over $6million (Reeves, 2011). The firm’s Q2 2012 andQ3 2013 revenue also beat expectations, by $2million and $16 million, respectively (Reeves,2012; Investor’s Business Daily, 2013). How-ever, Questcor traded down 7% when February2012 prescription data indicated a decline ofabout 20 scripts for MS. Questcor managementassured investors that low-volume, single-monthprescription data was highly volatile and that onemonth was not necessarily predictive of futuretrends (Investor’s Business Daily, 2012a). OnSeptember 19, 2012, the health insurer Aetnaannounced that it would cut back reimbursementsfor Acthar, causing Questcor’s stock to decline56% to $25.00 (Nathan & Siddiqui, 2012). Fivedays later, Questcor shares fell another 37% to$18.00 on September 24, 2012, when Quest-cor announced that an undisclosed U.S. agencywas investigating the firm’s promotional practices(Lopatto, 2012). Questcor’s stock price recov-ered over 2013 as the firm delivered annualrevenue of $798.9 million, a 57% increase over2012 (Questcor Pharmaceuticals, 2013a). Thougha controversial report written in February 2014by short-selling firm Citron Research questionedActhar’s ACTH content and sent Questcor sharesdown 10% (Chen & Larkin, 2014), Mallinckrodtagreed to buy Questcor two weeks later for $5.6billion (Alpert, 2014).

6 Criticisms and controversies

6.1 Pricing

Acthar’s price increase from $1,650 to $23,269triggered a significant backlash. Questcor was

criticized for raising the price of an old drugit acquired and did not develop, in apparentsimilarity to the stories years later of Valeantand Turing (Pollack, 2012). As biotechnologyreporter Andrew Pollack wrote in the New YorkTimes, “How the price of this drug rose so far, sofast is a story for these troubled times inAmericanhealth care—a tale of aggressive marketing, ques-tionable medicine, and not least, out-of-controlcosts” (Pollack, 2012). Medicare costs associatedwith Acthar increased 20-fold to $141.5 millionfrom 2008 to 2012, despite its low single-digitprice increases in this period (Table 1), due toits rapidly expanding sales volume, making itthe 139th most expensive drug out of 3,000 (Sil-verman, 2014). Acthar also incurred large coststo private insurers, resulting in the decision byAetna that it would no longer reimburse the drugfor most diseases (Nathan & Siddiqui, 2012).Express Scripts, the firm’s exclusive distribu-tor, had its ethics questioned due to a potentialconflict of interest between its mission to helpnegotiate lower drug prices and its reward fromlarger rebates on the more highly priced Acthar(Freudenheim, 2008). The price hike drew directrebukes from critics of corporate greed, and alsoattracted broader scrutiny of the company and thedrug.

6.2 Clinical efficacy

Because Acthar was approved by the FDA in1952, Questcor did not need to run clinical tri-als for Acthar before extensively marketing it fora variety of diseases. Given the expectation thata high-priced specialty drug should be therapeu-tically transformative, its price hike in 2007 drewattention to its medcial value and its efficacy hasbeen questioned.

In the case of IS, Acthar is currently the first-linetreatment and, as discussed in Section 2, is able tocompletely resolve IS in a significant fraction ofthe patient population. Nevertheless, the literature




contains a variety of studies indicating superior-ity, equality, and inferiority of Acthar relative toother options (Reuters, 2010; Metersky, 2016;Mechcatie, 2010a, Mechcatie, 2010b; QuestcorPharmaceuticals, 2010a; Snead III, Benton &Myers, 1983). A 2009 Johns Hopkins Hospitalretrospective study found equivalence betweenActhar and high-dose prednisone for IS, but rec-ommended that doctors choose the latter, based onan analysis of its patients and the 250-fold pricedifference between Acthar and prednisone (Kos-soff et al., 2009). In Europe, a synthetic, truncatedform of ACTH, Synacthen Depot, is used for ISinstead of Acthar, also at a substantially lowercost. However, the FDA has not yet approvedSynacthen Depot for any clinical use in the UnitedStates.1

Acthar’s efficacy in MS and NS has also beenstudied. Questions were raised when a 2009study sponsored by Questcor to analyze data—that remains undisclosed—was terminated after ayear (Neurologique Foundation Inc., 2010). Thetrial aimed to assess the efficacy of Acthar ver-sus another round of steroids for non-respondersto first-line treatment (Pollack, 2012). Thoughthe majority of doctors treating MS do not pre-scribe it, some have found the drug useful as arescue therapy when steroids fail. Others calledprescribing a $23,000 drug to treat an MS relapse“absurd” (Pollack, 2012; see also Hartung, 2017,for a recent criticism of Acthar efficacy andpricing). According to Questcor CEO Bailey,Acthar’s particular niche in MS treatment com-prised “serious, difficult-to-treat” cases (QuestcorPharmaceuticals, 2010b).

To assess the drug’s value in treating NS, Questcorsponsored and collaborated with Columbia Uni-versity on three clinical studies published in 2011,2012, and 2013. While the data lacked the robust-ness of an independently sponsored, randomized,double blind, placebo-controlled efficacy study,about 25–50% of initially treatment-resistant

patients responded to Acthar (Bomback et al.,2012; Bomback & Radhakrishnan, 2011; Hoganet al., 2013). On the other hand, a nephrologist inPhoenix stopped a small study testing the drug’sefficacy because of poor results (Pollack, 2012).In general, Acthar’s efficacy in relation to otheravailable treatments is inconclusive, although itsniche as a rescue therapy for some difficult to treatdiseases has clinical support.

6.3 Side effects

Before 2012, infants and MS patients were thepredominant users of Acthar. They typicallyhave a low number of concomitant medica-tions and comorbidities. However, Acthar usefor nephrology and rheumatology patients—whotend to have a high number of other medica-tions and conditions—significantly increased in2012. Since that year, Questcor has reported20 deaths and six disabilities to the FDA thatwere “suspected” to be associated with the treat-ment, although the FDA stressed that reports ofadverse events are observational and not verifiedas causal. In contrast, the 12 years preceding 2012had only 13 deaths recorded (Morgenson, 2014).

In 2014, Questcor was accused of downplayingActhar’s side effects when the firm did not reporta significant uptick in serious adverse events inits filings for the Securities and Exchange Com-mission (SEC) (Silverman, 2014). In response,Questcor filed an 8-K with the SEC disclos-ing that the number of adverse events reportedin 2011, 2012, and 2013 as a percentage ofprescriptions was 9.1%, 15.8%, and 13.7%,respectively (Questcor Pharmaceuticals, 2014).Questcor emphasized that Acthar’s safety profilewas well established, and that a significant changein patient population after 2011 could explainthe increase in 2012. Questcor cited a dispropor-tionate risk of severe adverse events in this newpatient population to explain the poor outcomes




(Questcor Pharmaceuticals, 2014). FDAinterven-tion has not occurred.

6.4 Government investigations

In September 2012, Questcor disclosed thatthe Department of Justice and the SEC wereinvestigating the company’s marketing andpromotional practices. The firm drew suspicionfrom regulators because of its financial ties withtop Medicare prescribers. In 2012, only 18 physi-cians wrote 15 or more Acthar scripts covered byMedicare, while at least nine of these doctors werespeakers, researchers, or consultants for Quest-cor (Ornstein, 2014). However, the marketinginvestigation did not reveal any illegal practices.

Two years later, in 2014, Questcor received a sub-poena from the Federal Trade Commission (FTC)for potentially violating antitrust laws when thefirm acquired rights to Synacthen Depot fromNovartis in 2013 for $135 million. Here, the FTCprobe did not reach a conclusion under Quest-cor’s management, but in early 2017, its successorMallinckrodt agreed to pay $100 million to set-tle these charges, and divested its U.S. rights toSynacthen Depot because of its anticompetitivepractices (Federal Trade Commission, 2017).

Government investigations are not unusual in thepharmaceutical industry. Questcor’s rapid growthand price hike made the firm a target for gov-ernment probes (Pollack, 2012), fueled in partby agents who stood to profit, such as potentialcompetitors, including Martin Shkreli’s companyRetrophin, which had tendered a $16 million offerto Novartis for the rights to Synacthen Depotprior to Questcor’s offer (Pollack, 2013). In 2014Retrophin filed an antitrust complaint in U.S. Dis-trict Court over Questcor’s asset purchase, whichwas settled by Mallinckrodt for $15.5 million in2015 (Retrophin, 2015). Shkreli now alleges tohave tipped off the FTC to the antitrust implica-tions of the Questcor deal, although the possibility

of an FTC investigation was discussed in themedia at the time of the original acquisition(Pollack, 2013; Kosman, 2017).

6.5 Short selling

The controversy over Questcor was not limitedto the pharmaceutical industry or the generalpublic. The financial media and the mainstreampress reported that activist short-sellers had tar-geted Questcor for attack, attributing several largedaily downward swings in the stock’s price to therelease of negative research reports by these firms(Pollack, 2012; Chen & Larkin, 2014; Investor’sBusiness Daily, 2012b). Questcor’s rapid rise andActhar’s relative obscurity in an atmosphere ofcontroversy fit a short-selling narrative templateof an overvalued, possibly corrupt company.

Despite these negative reports, however, mostinvestors continued to believe in Questcor’sprospects. Although Questcor experienced signif-icant volatility during its rise, investor confidencein the firm was ultimately rewarded. Only weeksafter a two-day 16% decline attributed to short-seller activity (Chen & Larkin, 2014), Mallinck-rodt purchased the firm at a 27% premium pershare (Pollack and Bray, 2014).

7 Patient impact

The new price of Acthar had numerous impli-cations for patients, the healthcare system, andQuestcor’s business. Without its additional assis-tance, uninsured patients would have directlysuffered from Acthar’s high price, while the gov-ernment, private insurers, and insured patientsstill endured higher costs. However, the new priceallowed Questcor to avoid bankruptcy, ensuringthe continued availability ofActhar to the patientswho used it. Because of Questcor’s post-2007profitability, the company re-invested in R&Dand sales to better understand Acthar’s efficacyand widen its patient access. By 2009, the firm




Table 2 Examples of trials and studies run by Questcor as part of their R&D activities. Source: Questcor10-K filings, 2011 and 2013.

Research & development

Class Disease Study type or purpose

On-label development Nephrotic syndrome Phase IV clinical trialInfantile spasms Clinical study establishing quality of care

indicatorsSystemic lupus erythematous Phase IV clinical trial

Off-label development Diabetic nephropathy Phase II clinical trialPulse therapy for multiple sclerosis Phase II clinical trialCognitive protection/autism PreclinicalTraumatic brain injury PreclinicalAmyotrophic lateral sclerosis Preclinical, Phase II clinical trialAcute respiratory distress syndrome Phase II clinical trial

Pharmacology N/A Improve understanding of Acthar’smechanism

Multiple sclerosis Study immune modulating effects of Actharapplied to serum from MS patients

Study neuroprotective properties of ACTHrelevant to MS

Other Infantile spasms Review of evidence for sNDA submissionN/A Updating Acthar’s product label

was funding over two dozen pre-clinical and clin-ical studies (Questcor Pharmaceuticals, 2009),and by 2013, over 70 studies and clinical trialswere ongoing (Questcor Pharmaceuticals, 2013a)(Table 2). R&D expenses were almost 20-foldhigher than in 2006 (Figure 4).

Questcor’s initial focus was on patients with IS, itsprimary market. In late 2007, the firm launched anActhar patient assistance program administeredby the National Organization for Rare Disorders,providing over $20 million of Acthar withoutcharge to uninsured and underinsured patients.As a result, the company was “not aware of asingle patient” in need of Acthar without access,which was not the case prior to the strategychange (Questcor Pharmaceuticals, 2008). From

0

50

100

150

200

250

2013201220112010200920082007200620052004200320022001

$ m

illio

ns

Year

Questcor R&D and SG&A

R&DSG&A

Figure 4 Questcor R&D and SG&Aexpenses, 2001–2013.

2007 to the end of 2011, Questcor provided $124million of the drug through this program, mostof which has been used to treat IS (QuestcorPharmaceuticals, 2011).




The use of the drug in IS was still off-label atthis point, even though physicians had been treat-ing IS with Acthar for decades. This remarkablefact was acknowledged by the FDA in its eval-uation of Questcor’s application: “Though notapproved for the treatment of IS (Acthar Gelwas approved in 1952 and has been approvedsubsequently for numerous indications), ActharGel has been the treatment of choice for IS formany years” (CDER, 2010). Questcor’s goal tocomplete the FDA approval process would stan-dardize the recommended dosing regimens andadministration procedures for IS, and would alsoreplace the circuitous referral process involv-ing MSLs with more conventional sales andmarketing operations for Acthar.

The FDA rejected Questcor’s initial request forapproval in 2006, requiring the company to pro-vide more evidence. However, Questcor and theFDA agreed that the firm could reanalyze datafrom the breadth of existing studies rather thanconduct a new clinical trial (Questcor Pharma-ceuticals, 2007). In particular, the FDA requesteddetailed records on individual patients (StanfordGroup Company, 2008). With cash generatedfrom its new business strategy, Questcor investedclose to $10 million to resubmit the sNDAwith more data (Questcor Pharmaceuticals, 2009,2008).

In 2010, the FDA found Questcor’s submis-sion of three studies supporting Acthar’s efficacy,and four evaluating its safety, sufficient for itsapproval (Mechcatie, 2010b; CDER, 2010). Inconjunction with the review of the sNDA for IS,the FDAupdatedActhar’s product label to include18 other indications with evidence or rationale forefficacy, including acute exacerbations of MS andinducing remission of proteinuria in NS (CDER,2010). In the FDA’s summary of its evaluation,the regulator noted the unusual nature of thesubmission (CDER, 2010):

The data that the sponsor has provided differ considerablyfrom that typically submitted in an NDA. As noted earlier,none of the studies were commissioned or conducted by thesponsor, and detailed protocols, and, in particular, detailedstatistical plans for the analyses of these studies, did notexist.

However, the summary went on to confirm thatthe combined results did demonstrate significantefficacy (CDER, 2010):

As described above, the PCNS AC [Peripheral and CentralNervous System Advisory Committee] clearly concludedthat the sponsor had provided substantial evidence of effec-tiveness. The review team agrees, as do I. I believe thatthe sponsor has met the statutory standard of substantialevidence of effectiveness based on having submitted a sin-gle adequate and well-controlled trial and confirmatoryevidence. Study 01, though small, produced clear and con-vincing evidence of effectiveness on an outcome widelyconsidered by the community of experts to be a clinicallyimportant measure of the utility of a treatment of IS (indeed,one could consider such a strong finding of effectivenessfrom such a small study as further evidence of the robustnessof the result).

While improving IS patients’ access to Acthar,Questcor concurrently ramped up SG&A ex-penses, eventually reaching over 10 times its 2006levels by 2013 (Figure 4). The firm extensivelymarketed Acthar for MS, NS, and rheumatic dis-eases. In most cases, the drug was prescribed

Table 3 Number of paid prescriptionsof Acthar for MS, NS, and IS indica-tions, and total number of vials shipped.Source: Questcor 10-K filings.

Paid prescriptions

Year

Disease 2009 2010 2011

MS 556 1,212 3,090NS 20 30 269IS 349 367 427

Vials shipped 5,973 6,696 10,710




Table 4 Number of vials of Acthar shipped,2007–2013. Source: Questcor 10-K filings.

Vials shipped

Year Number of vials

2007 5,100–5,7002008 5,8302009 5,9732010 6,6962011 10,7102012 20,7412013 28,112

by physicians for use as a second-, third-, orfourth-line treatment. Paid prescriptions ofActhargreatly increased from 2010 to 2011, largely bygrowth in MS and NS (Table 3). This trend,supplemented by a newly launched sales forceto market Acthar to rheumatologists, continuedinto 2012, as vials sold almost doubled to 20,741(Table 4).

Though Questcor initially deployed 12 sales rep-resentatives to focus on two rare neuromusculardisorders—dermatomyositis and polymyositis—positive physician response led the firm to expandthe team to 50 people in order to sell Acthar forother rheumatic diseases. In 2013, Questcor’sfinal full year as an independent company, 7,400patients with serious diseases were treated withabout 28,000 vials of Acthar prescribed by 3,000physicians (Questcor Pharmaceuticals, 2013a, b)(Table 4). Given that 2–10 vials may be neededperActhar prescription, over 10,000 patients havelikely benefited fromActhar since 2007 (QuestcorPharmaceuticals, 2010b).

8 Counterfactual simulation

We now turn to the question of what wouldhave happened to Questcor without the 2007price increase. In 2006, the struggling companyprojected that it only had enough cash to fund

operations for a little more than a year, anddisclosed that traditional debt and equity financ-ing had not been available on acceptable terms(Questcor Pharmaceuticals, 2006). To explorethe counterfactual cases where Questcor doesnot raise Acthar’s price by 1,300%, we con-struct a financial model of Questcor and projectits performance forward from 2006 accordingto three cases encompassing two alternativebusiness strategies. The financial model con-sists of simulations of Questcor’s balance sheet,income statement, and cash flow statement tiedto a set of assumptions for Acthar revenues inIS and MS. Case 1 and Case 2 capture the bestand worse-case scenarios, respectively, of an MS-focused growth strategy that maintains the prioryear’s sales-force expansion. Case 3 is a cost-cutting strategy that neglects potential MS salesgrowth. Key assumptions can be found in Table 5,and a full list of assumptions can be found inthe Appendix. Key drivers of our models arethe assumptions of Acthar’s penetration into theMS market, Acthar’s price, and SG&A and R&Dexpenses. The impact of investing and financingassumptions is minimal.

Our models project that Questcor would havebecome insolvent between 2008 and 2010(Figure 5). In the optimistic Case 1, Questcorraises Acthar’s price by 12% per year, achievesa 10% MS market penetration by Q2 2008 witha 5% increase in penetration every year. Despitesuch an aggressive market penetration forecast—fivefold more optimistic than Wall Street expec-tations at the time (ThinkEquity Partners LLC,2006; Stanford Group Company, 2008)—the firmstill becomes insolvent by Q2 2009. In Case 2,Acthar penetrates the MS market in line with WallStreet estimates and becomes insolvent by Q22008. In Case 3, despite an ambitious 45% cut inSG&A and R&D expenses, Questcor’s IS annuitybusiness cannot sustain the company and the firmbecomes insolvent by Q2 2010.




Table 5 Key assumptions used in counterfactual simulation whereQuestcor does not raise the price of Acthar for three cases: Case 1:Best case MS-focused growth strategy; Case 2: Worst case MS-focusedgrowth strategy; and Case 3: Cost-cutting strategy.

Case l Case 2 Case 3

Key revenue driversActhar price/vial ($USD) 1,650 1,650 1,650Annual price increase 12% 12% 12%Acthar rebate % 0% 0% 0%

Infantile spasmsPatient population 2,300 2,300 2,300Penetration 50% 50% 50%Vials/patient 4.5 4.5 4.5

Multiple sclerosisPatient population 250,000 250,000 250,000% r/r MS intolerant to corticosteroids 9.6% 9.6% 9.6%Average flares/year 1 1 1

Penetration 10% 5% 1%Penetration growth 5% 1% 0%

Vials/patient 2 2 2

Key expenses (as % of revenue)COGS 23% 23% 23%

R&D expense 0% 0% −45%SG&A expense 0% 0% −45%

Figure 5 Results of a counterfactual simulation where Questcor adopts alternative business strategies.




In all cases, Questcor becomes insolvent andproduction of Acthar would have ceased unlessanother firm acquired Questcor’s operations,although attracting buyers would have been dif-ficult. Given the drug’s poor financial perfor-mance, finding a for-profit acquirer that wouldnot subsequently raise prices as Questcor didseem implausible. Perhaps a large pharmaceuticalcompany with an existing sales infrastructure tar-geting neurologists could have integrated Actharinto its network, although its $15 million in rev-enue would have been unlikely to draw interest.

9 Discussion

Pharmaceuticals have a unique combination offour characteristics. Much of the popular dis-cussion has focused on the two best knownof these: patient impact and monopoly power.However, the case of Questcor and Acthar high-lights the importance of the two lesser-knowncharacteristics of pharmaceuticals: their poten-tial for underpricing and their capital marketimperfections. This combination may require adifferent conceptual framework than the standardsupply/demand analysis used to study other con-sumer product markets. We consider all four ofthese characteristics in turn.

First, pharmaceuticals can often dramaticallyalter the quality and quantity of life of its cus-tomers. This feature alone separates them fromother consumer products, raising a host of moraland ethical dilemmas. For example, some wealthyindividuals have paid up to $20 million for a spaceflight. This may be a once-in-a-lifetime experi-ence for them, but it causes no long-term changesin their life outcome, nor has there been any out-cry over price gouging or unfair access in suchcases.

Second, pharmaceuticals have elements ofmonopoly power. Moreover, government policyplays a central role in such monopolies, creating

and encouraging them through the patent system.The standard economic framework for analyzingmonopolies suggests that price controls improvesocial welfare in the absence of other considera-tions. The government regulates electricity prices,and by the same logic, it could be argued thatdrug prices should be regulated as well. As aconsequence of this logic, an emerging narrativeis that, in exercising monopoly pricing powerover compounds that literally can have life-and-death consequences, biopharma companies aresetting prices that are “too high,” both for thepatients who take these drugs, and the healthcareeconomists who study price impact and value.

However, the quid pro quo of a patent is preciselythe prospect of outsized monopoly profits for afinite period of time, in exchange for full disclo-sure of and free access to novel and unobviousideas for posterity after patent expiration.

The case of Questcor and Acthar underscores thetwo other important features of the pharma indus-try: prices can be too low for a given product, andmarket imperfections can have an impact on thecost of capital.

No one benefits if an effective drug is priced solow as to cause the producer to go out of busi-ness or for the drug to be discontinued. Preciselybecause of the regulatory barriers that allow apharmaceutical firm to maintain its pricing power,it is often not possible for competitors to fill aproduct void. However, even in the absence ofpatent protection, the high fixed costs associatedwith drug manufacturing are often a sufficient bar-rier to entry that can cause severe drug shortageswhen a manufacturer ceases operations.

A well-known case in point is the drug shortagesfor certain generic cancer drugs. In a 2013 surveyof 214 oncologists, “82.7% were unable to pre-scribe the preferred chemotherapy agent becauseof shortages at least once during the previous




six months” and more than 75% indicated thatthese shortages led to major changes in the courseof treatment (Gogineni, Shuman & Emanuel,2013). An economic analysis conducted by theU.S. Department of Health and Human Servicesfound that, among a sample of sterile injectableoncology drugs, the ones experiencing shortagessince 2008 exhibited a median price decline of49.1% between Q1 2006 and Q1 2011, whereasthe ones with no shortages exhibited a medianprice increase of 0.3% during the same period(Haninger, Jessup & Koehler, 2011). Apparently,drug manufacturers respond to basic economicincentives, as their shareholders demand.

More recently, the U.S. Government Account-ability Office (U.S. Government AccountabilityOffice, 2016) issued a report of the price trendsof generic drugs covered under Medicare Part D,and found that between 2010 and 2015, a chang-ing basket of 2,378 generic drugs decreased inprice by 59%, but a subset of 315 generics expe-rienced a price increase of more than 100% duringthis period. Such diverse price dynamics are theconsequence of a complex economic landscape(Reiffen & Ward, 2005) in which supply anddemand factors, financial incentives, and new leg-islation such as the Hatch-Waxman Act of 1984(Boehm, Yao, Han & Zheng, 2013) contribute toextraordinary price volatility.

In the case of Questcor, had the firm gone outof business, it is not clear that any competi-tor could have started production of Acthar overany reasonable time frame, while even today, itspotential synthetic competitor, Synacthen Depot,is still only in phase 1 trials for its first indicationin the U.S. (for Duchenne muscular dystrophy)(Mallinckrodt, 2016).

Moreover, there is a well-developed corporate-finance literature showing that the cost of externalcapital is higher than the cost of internal capitalbecause of capital market imperfections (Froot &

Stein, 1991; Hubbard, 1998). As a result, cash-constrained firms may invest less than the optimalamount in promising new projects, and somefirms may not be able to invest anything at all.This effect appears to be at work in the case ofQuestcor. Some of the funds made available bythe higher price of Acthar led to the developmentof novel indications for the treatment. Acthar wasfinally approved by the FDA for IS, and thou-sands of patients now use it for NS and MS. Asnoted, there is debate in the literature and medicalcommunity about the relative value ofActhar ver-sus other treatments for these conditions. In theclinic, however, we observe that many doctorsand patients have chosen Acthar, and the eco-nomic theory of revealed preference suggests thatthey are now strictly better off.

Questcor’s journey from a small, struggling firmthat acquired the unprofitable Acthar therapyto a billion-dollar single-drug company stirredtremendous controversy by its 14-fold priceincrease in 2007. However, the firm was alsoable to invest the resources to greatly expandaccess to the therapy, which would have beenimpossible otherwise. Acthar use has evolvedthrough multiple stages since the 1990s, whenonly a fraction of infants in need had access tothe transformative therapy. After 2001, Quest-cor stabilized its supply, yet in 2006 the drugalmost disappeared from the market as the firmapproached insolvency. Meanwhile, only a fewhundred infants benefited from Acthar every yearduring the 2001–2006 period. The company’s2007 actions ensured availability of the drug notjust for infants with IS, but eventually for thou-sands of patients with severe, difficult-to-treatdiseases every year.

A comparison with Valeant Pharmaceuticals andits price-hiking behavior is useful to illustrate thedifference between the two strategies. From 2009to 2013, Questcor’s financial metrics differedsharply from those of Valeant Pharmaceuticals.




Figure 6 Comparison between Questcor and Valeant in terms of R&D and SG&A as a percentage of sales.

Questcor’s R&D/Revenue ratio ranged from 7%to 11%, while Valeant’s dropped to less than 3%.Comparing the sum of R&D and SG&A asa fraction of revenue further differentiates thetwo companies because of Acthar’s large SG&Arequirements. Questcor consistently exceededValeant in this metric by 10–15 percentage points(Figure 6), indicating the firm’s greater commit-ment to reinvesting cash in product R&D, selling,and marketing over distributing it to shareholdersand management.

As a for-profit entity, Questcor was clearly notmotivated solely by altruism. Management andshareholders were rewarded financially through-out Questcor’s rapid growth, and Questcor’sacquisition of the rights to Synacthen Depot in2013 demonstrated to the FTC a willingness toengage in anticompetitive—but entirely legal andcommonly used—practices to maintain Acthar’shigh price. Nevertheless, corporations are, byconstruction and mandate, profit-seeking enti-ties, and management is expected to carry outits legal fiduciary responsibilities to companyshareholders. In the case of Questcor’s 2007 pric-ing decision, this profit motive and risk-takingcapacity were aligned with customer benefit, aprinciple that is at the core of the pharmaceutical,and all other, industries in the private sector.

It is possible to simulate a non-profit version ofQuestcor in which a “caretaker CEO” in 2007might raise prices just enough to prevent theinsolvency of the company, yet not enough toproceed with the Acthar sNDA, expand its salesforce, provide sponsorship and co-pay assistanceto the uninsured and underinsured, or fund R&Din Acthar’s use for other indications, let alone the20-fold expansion of R&D spending that occurredunder Questcor’s historical price increase. Insuch a hypothetical scenario, Questcor wouldonly continue the manufacture and marketing ofActhar for a market limited to the small numberof patients with IS, where it would remain an off-label treatment (although still the standard of carein the United States), and have no use in the treat-ment of the much larger group of patients withMS, NS, and rheumatic diseases. However, theviability of a nonprofit version depends criticallyon the availability of philanthropic support—bothfunding and human resources—to maintain theorganization as a going concern. In this case, thenumber of patients treated would likely be con-siderably smaller than in the for-profit scenario.

More generally, there is broad consensus amongeconomists that market prices play a critical rolein the efficient allocation of scarce resources. Inthe wake of Hurricanes Harvey and Irma, the




prices of many consumer staples such as drinkingwater, food, and gasoline have skyrocketed in theaffected areas, in many cases violating anti-price-gouging state laws. Although many consider suchprice hikes reprehensible—especially in the after-math of a natural disaster—economists have adifferent view. According to Michael Giberson(Sorkin, 2017) of Texas Tech University, “Pricecaps discourage extraordinary supply efforts thatwould help bring goods in high demand into theaffected area...You discourage conservation ofneeded goods at exactly the time they are in highdemand...In a classic case of unintended conse-quences, the [anti-price-gouging] law harms thevery people whom lawmakers intend to help.”

This logic lies at the core of many widely usedpricing policies in other industries such as peak-load pricing of electricity and other regulatedutilities; higher airfares during holidays; higherhourly wages for working overtime shifts; andthe “surge-pricing” policies used by Uber andother ride-hailing companies. However, the factthat “price gouging” is leveled against certainparties like Uber (Lowrey, 2014), but not oth-ers, suggests that there is more to these issuesthan just economics. Moral and ethical dimen-sions can overshadow business considerations incertain markets under certain circumstances, andin these cases, a more inclusive and humanisticprocess for determining prices and quantities maybe required.

10 Conclusion

In the business of extending life, the biopharmaindustry routinely faces decisions deeply mired inethical questions that directly affect human healthand welfare. An increase in profitability is toooften assumed to be always at the cost of patients’wellbeing. The case of Questcor provides a use-ful counterpoint to the popular narrative that drugprice increases are unnecessarily high.

However, our simulations do not address thebroader and vastly more complex question ofwhat the “appropriate” price should be. From apurely economic perspective, a for-profit com-pany charging what the market will bear is inthe best interests of its shareholders and com-mon practice in all other private-sector industries.From an ethical perspective, especially whenpatient lives are at stake, charging what the marketwill bear seems unjust and morally offensive.

Resolving this conflict is beyond the scope of ourstudy, but the growing concerns among patients,payers, and policymakers suggest that we needto strike a better balance between private-sectortherapeutic efforts and the public interest. Reach-ing this new balance may be facilitated by newmetrics for patient impact, value-based pricingand reimbursement policies, public/private part-nerships for drug development and—in extremecases—the nationalization of key therapies thathave sufficient societal benefits and insufficientprivate-sector support such as vaccines, antibi-otics, and the repurposing of off-patent drugs.

The mixed reputation of the pharmaceuticalindustry—fueled by ethical violations like price-gouging behavior, which should be outlawed inall industries, including healthcare— is counter-productive, and threatens the industry’s ability toattract the best talent and earn premium pricesfor new, breakthrough drugs. It is in the interestof all stakeholders to distinguish between uncon-scionable pricing policies and the legitimate useof market forces to allocate resources where theyprovide the greatest good for the greatest number.

Acknowledgments

We thank Ernie Berndt, Michael Henderson, Deb-bie Lucas, Ilan Oren, Tomas Philipson, CameronTurtle, Heidi Williams, and Mandy Yeung fortheir helpful comments and suggestions, andJayna Cummings and Allison McDonough for




their editorial assistance and helpful comments.Research support from the MIT Laboratory forFinancial Engineering is gratefully acknowl-edged. The views and opinions expressed in thisarticle are those of the authors only, and donot necessarily represent the views and opinionsof any institution or agency, any of their affil-iates or employees, or any of the individualsacknowledged above.

Funding and Conflicts Statement: No fundingbodies had any role in study design, data collec-tion and analysis, decision to publish, or prepa-ration of this manuscript. No direct funding wasreceived for this study. The authors were person-ally salaried by their institutions during the periodof writing (though no specific salary was set asideor given for the writing of this manuscript), nordid the authors have any financial stake in Quest-cor or Mallinckrodt, except possibly through theirownership in index mutual funds and ETFs withholdings in these two companies, where the sizeand timing of such holdings are beyond the con-trol of the authors. TB reports no conflicts; SHreports personal investments in private and publicbiotech companies, and is undergraduate pres-ident of the MIT Biotech Group; AL reportspersonal investments in private biotech compa-nies, is an advisor to BridgeBio Pharma, a directorof Roivant Sciences and the MITWhitehead Insti-tute for Biomedical Research, and an Overseer ofBeth Israel Deaconess Medical Center.

Appendix

Table 6 Detailed assumptions for all three casesused in counterfactual simulations.

All cases

Investing and financingactivities ($thousands)

2008Q2

PPE –

Table 6 (Continued)

All cases

Purchase of short-terminvestments

–

Sale of short-term investments 10,142Other (sale of benzodiazepines) 75Issuance/(repayment) of debt –Issuance/(buyback) of stock –

Other assumptions 2008Q2–2012Q2Capex (% of revenue) 0%D&A (% of revenue) 1%Tax rate 40%NOL balance (thousands) 103,400

Interest ratesInterest rate (2007) 4.87%Interest rate (2008) 2.43%Interest rate (2009) 1.00%

Balance sheet ratios 2008Q2–2012Q2Accounts receivable 11%Inventory 66%Prepaid expenses 5%Accounts payable 50%Accrued expenses 6%Sales reserves 16%Other accrued liabilities 11%

Other items ($ thousands) 2007Q2Cash 3,931Common stock 106,551Retained earnings (accumulated

deficit)−94,732

Total shareholder’s equity 11,827

Note1 This drug has experienced controversies of its own—

in January 2015, Mallinckrodt raised the Canadianprice of this generic by 2000%. The reason? Accord-ing to Mallinckrodt, in 2014 its European manufacturerannounced it would cease production of Synacthen Depotby 2016, requiring the drug company to identify and ini-tiate production with a new manufacturer. In a 2015 pressrelease, Mallinckrodt explained that:




“Mallinckrodt is committed to supporting continued andbroader availability of Synacthen and Synacthen Depot,and committed to investing the more than $US50 millionrequired to support continued manufacturing, regulatory,research and market access for the products. Importantly,though adjusting the price of the products will contributeto long-term sustainability, the company does not expectthe Synacthen products to be profitable in the near-term,even with the new pricing model.”

See also the discussion in Section 6.4 regarding anti-trustissues surrounding Synacthen Depot.

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Keywords: drug pricing; biotech; price gouging;infantile spasms; Questcor Pharmaceuticals

